Substitute for the U.S. Dollar: Euro & Japanese Yen
The U.S. dollar for a long time has been the unprecedented king of currencies or global currency. Even though there is no such concept of global currency but in the real-world things are different. The U.S. dollar was pegged to the exchange rate of other currencies or was to be considered as currency for cross rate and the U.S. dollar was pegged to gold at the Bretton woods agreement in 1944. This led to rising and supremacy of the U.S. dollar and is still the king of currencies.
According to the data released by IMF for the second quarter of 2019, it showed that 61.63% of total foreign reserves held by central banks around the world were in U.S. dollars. It was followed Euro (20.35%), the Japanese Yen (5.41%), and finally Pound Sterling (4.43%). Now, the question arises which currency can be used as a substitute for the U.S. dollar? If we go by the data, the answer will be Euro, Pound Sterling, and Japanese Yen. But we shall consider Euro and Japanese Yen.
Let us first take the example of the Japanese Yen first and later talk about Euro. Firstly, we need to understand the difference between currency reserves and currency used for international trade or payments. Currency in circulation for international trade is the currency used for payments of goods & services and currency in reserves means the currency a central bank will prefer to keep as a reserve and use it in case its domestic currency fluctuates or to maintain the value of its domestic currency. In terms of currency in circulation for trade Pound Sterling comes third after Euro. But we shall still consider the Japanese Yen over the Pound due to many reasons.
One of the most important reasons to consider the Japanese Yen as an alternative to the USD is because of Japan’s current account surplus.
For a long time, Japan’s current account has been in surplus. It is also considered as a currency haven amongst currencies. Japan’s Trade pattern is unique compared to that of other countries. It does not have any support of natural resources and so to support its economy it adopted a different economic approach. In this approach, Japan gained specialization in certain products or tried to gain a comparative advantage over other countries. Since it cannot produce oil and other natural resources it imports oil and it is the largest component in terms of imports. In exchange for that, it trades technology and gives specialized services. Japan is now more of a services economy rather than a manufacturing. It is one of the biggest investors globally and the top 5 FDI investors in the US economy.
Japan’s trade risks in terms of economical and political have been extremely low. Neither does it get involved in any kind of trade wars with any country and nor there has been any political instability in the country. Japan has so far only witnessed a major financial crisis due to its economic restrictions, and it resulted in negative interest rates. The only major problem Japan has is its geographical condition and immensely prone to natural disasters. Japan has been hit by earthquakes and Tsunamis quite often and this breaks their economy. The economy and country come to a halt eventually declining the growth. Apart from this, there doesn’t seem to be any other significant problem with Japan. The trade surplus, highest global investments, and stable political situation makes the Japanese Yen one of the best alternatives to the U.S. dollar.
As discussed above Euro stands at number two as the most traded currency in the world. It is number two in the reserve currencies list after the right U.S. dollar. The reason why Euro is so strong is because it is used as currency in 19 countries. When a single currency is used by different countries and up to this extent then it is evident that it will be circulated in a greater capacity. Overall Euro has been a stable currency for a long time, and it hasn’t seen major volatility. Euro has been mostly used within the eurozone that has allowed it to be so strong. The biggest advantage is during an event of sudden economic panic situations such as an oil price change that will cause other countries' currencies to fluctuate a lot but will not impact the euro to a greater extent. Because most of the eurozone members trade within.
Adding to this the eurozone has some very strong economic powerhouses like Germany, France, and Italy. Germany had a stellar trade surplus in 2018 and it was their third surplus in a row, or we can say hattrick in sports language. Economic powerhouses like these make the eurozone even stronger. But there are problems in the eurozone as well. Countries like Greece, Portugal, and Spain are some examples of troubled economies. The Greece crisis is well known by everyone and the similar disclosure of facts by Portugal and Italy past Greece's declaring its true situation has brought down the trust in the eurozone. Situations like Brexit are another matter of concern to deal with. There are no major environmental concerns for the eurozone. But in terms of economic and political risk eurozone is a highly unstable economy. Their trade patterns are simple and clear because most of the trade is done within. Considering this if the eurozone is dissolved then the entire concept of the euro as a global currency would bring chaos in the world economy.
If we try to compare both the currencies regarding their respective economies, we find that Eurozone is a comparatively large concerning economy, and the euro are traded or circulated ten times more than the Japanese Yen. But this comparison would be comparing apples with oranges. Euro has no existence without the eurozone. Eurozone at the present day is strong only because of Germany. If at all the eurozone is dissolved and situations like Brexit continue to happen then Euro will be the worst nightmare in the history of the economic and financial crisis. This leads us to a thought-provoking scenario that whether the Japanese Yen should be considered as an alternative to the U.S. dollar? Considering the preeminent political stability in Japan which can be set as an example for other nations to follow and a well-managed economy makes the Japanese Yen a better option.
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